Edited version of private advice

Authorisation Number: 1051628433635

Date of advice: 17 February 2020

Ruling

Subject: Scrip-for scrip roll-over - calculation of capital gain on ineligible proceeds

Question 1

Is the ineligible proceeds from the disposal of the NewCo shares to BidCo, for which roll-over is not available pursuant to subsection 124-790(1) of the ITAA 1997, equal to $X?

Answer

Yes

Question 2

Will the payment by the Applicants to the Coy D shareholders, being equal to X per cent of the duty payable on the transfer of the NewCo shares, reduce the capital proceeds from the CGT event?

Answer

Yes

Question 3

Is the aggregate of the Applicants cost base attributable to the ineligible proceeds equal to $X, pursuant to subsection 124-790(2) of the ITAA 1997?

Answer

Yes

This ruling applies for the following period:

Year end 30 June 2020

The scheme commences on:

1 July 2019

Relevant legislative provisions

Income Tax Assessment Act 1997 Subsection 110-25(2)

Income Tax Assessment Act 1997 Subsection 110-25(3)

Income Tax Assessment Act 1997 Section 110-35

Income Tax Assessment Act 1997 Subsection 116-50(1)

Income Tax Assessment Act 1997 Subsection 124-10(3)

Income Tax Assessment Act 1997 Subsection 124-790(1)

Income Tax Assessment Act 1997 Subsection 124-790(2)

Income Tax Assessment Act 1997 Subdivision 124-M

Income Tax Assessment Act 1997 Subdivision 124-N

Relevant facts and circumstances

1.               COY A is an Australian resident unlisted public company incorporated XX/XX/20XX.

2.               The shares in COY A were originally wholly owned by Trust A, an Australian resident unit trust.

3.               There were X unit holders each holding X units with a total cost base of $X.

Pre-sale restructure

4.               A restructure was undertaken converting the trust structure to a corporate structure with the replacement of Trust A by NewCo.

5.               NewCo is an Australian resident company incorporated on the XX/XX/ 20XX to acquire all the assets of Trust A.

6.               Under that arrangement the unitholders of Trust A received replacement shares in NewCo for which the unitholders obtained roll-over relief under Subdivision 124-N of ITAA 1997.

Prior to sale

7.               The Group (which included NewCo) were approached by a third party investor, Coy D, and an agreement was reached with Coy D to acquire X per cent interest of the Group.

8.               Under the Share Purchase Agreement (SPA) the NewCo shareholders agreed to sell their shares in NewCo and BidCo agreed to buy the shares for the Purchase Price.

9.               For agreeing to sell all their shares in NewCo, all the NewCo shareholders were offered cash and additional shares in HoldCo in their respective portions and on the same terms.

10.            On the same date as the SPA was entered into, the NewCo shareholders incorporated HoldCo with X shares. Another company was incorporated, BidCo, with HoldCo as its ultimate holding company. Coy D loaned $X to HoldCo that was used to pay part of the cash consideration to the NewCo shareholders.

11.            The NewCo shareholders incurred $XX in consulting and legal fees in relation to the restructure and sale of shares in NewCo.

12.            The NewCo shareholders chose roll-over relief under Subdivision 124-M of the ITAA 1997 in respect of the exchange of the new shares that formed part of the Total Consideration.

13.            The first element of the cost base of the total NewCo shares is $X being the sum of shares issued on incorporation ($X) and the cost base of all the Trust units $X rolled-over under Subdivision 124-N.

14.            The total cost base of the NewCo Shares attributed to the ineligible part is $X.

15.            Under the terms of the SPA the NewCo shareholders agreed to pay Coy D an amount equal to X per cent of any duty payable on the transfer of the shares in NewCo to BidCo.

16.            Following the completion of the arrangement, the loan from Coy D to HoldCo were converted into shares in HoldCo that resulted in Coy D owning XX per cent in HoldCo and the remainder of the shares were owned by the NewCo shareholders.

Reasons for Decision

These reasons for decision accompany the Notice of private ruling for the applicants, being the former shareholders of NewCo.

While these reasons are not part of the private ruling, we provide them to help you to understand how we reached our decision.

All legislative references are to the ITAA 1997 unless otherwise indicated.

Question 1

Is the ineligible proceeds from the disposal of the NewCo shares to BidCo, for which roll-over is not available pursuant to subsection 124-790(1) of the ITAA 1997, equal to $X?

Summary

The ineligible proceeds from the disposal of the NewCo Shares to BidCo, pursuant to subsection 124-790(1), are equal to $X being the cash consideration paid.

Detailed reasoning

1.               Subsection 124-790(1) provides that the original interest holder can obtain only a partial roll-over if the capital proceeds received in exchange for its original interest include something (like cash) other than its replacement interest. Any capital proceeds for the exchange, other than replacement interests, are known as 'ineligible proceeds'. There is no roll-over for that part (the ineligible part) of its original interest for which it received ineligible proceeds.

2.               For disposing of their NewCo shares to BidCo, the NewCo shareholders received Total Consideration comprising:

·                  cash consideration of $X, and

·                  share consideration worth $X (for the X newly issued ordinary shares in HoldCo)

3.               As the cash consideration received is not a replacement interest, it is considered ineligible proceeds. Pursuant to subsection 124-790(1), no roll-over is available for this ineligible part under Subdivision 124-M.

Question 2

Will the payment by the Applicants to the Coy D shareholders, being equal to X per cent of the duty payable on the transfer of the NewCo shares, reduce the capital proceeds from the CGT event?

Summary

The payment when made by the Applicants to the Coy D shareholders equal to X per cent of the any duty payable on the transfer of the NewCo shares will reduce the capital proceeds received from the CGT event pursuant to the operation of subsection 116-50(1).

Detailed reasoning

4.               Subsection 116-50(1) states:

The *capital proceeds from a *CGT event are reduced by:

(a)             any part of them that you repay; or

(b)             any compensation you pay that can reasonably be regarded as a repayment of part of them.

However, the capital proceeds are not reduced by any part of the payment that you can deduct.

5.               Under a clause in the SPA, the NewCo shareholders are required to pay the Coy D shareholders an amount equal to X per cent of any duty payable by BidCo on the transfer of the NewCo shares to BidCo.

6.               Therefore, any payment that is made pursuant to this clause in the SPA will fall within subsection 116-60(1), as it is a repayment of part of the capital proceeds from disposing of their NewCo shares to BidCo. Accordingly, the payment (once determined) will be considered a repayment of part of the Cash Consideration and therefore lead to a reduction in the ineligible proceeds from the disposal of the NewCo shares to BidCo.

Question 3

Is the aggregate of the Applicants cost base attributable to the ineligible proceeds equal to $X, pursuant to subsection 124-790(2) of the ITAA 1997?

Summary

The cost base attributable to the ineligible proceeds (being the cash consideration) is equal to the aggregate of the Applicants' cost base, being $X, pursuant to subsection 124-790(2).

Detailed reasoning

First element of cost base

7.               Subsection 110-25(2) provides that the first element of a CGT asset's cost base is the total of:

(a)             the money you paid, or are required to pay, in respect of acquiring it, and

(b)             the market value of any other property you gave or are required to give in respect of acquiring it (worked out as at the time of the acquisition).

8.               On incorporation of NewCo, each Applicant acquired X ordinary shares issued for $X. The total first element of the cost base of the shares in NewCo at that time was $X.

9.               Each Applicant chose to obtain roll-over relief under Subdivision 124-N in relation to the trust restructure and as such, subsection 124-10(3) provides that whereyou acquired the original asset on or after 20 September 1985, the first element of each new asset's cost base is:

The original asset's cost base

(worked out when your ownership of it ended)

Number of new assets

10.            Therefore, the first element of each of the additional X shares issued by NewCo to each of the Applicants is equal to the first element of each of the X units they held in the Trust.

11.            The total of the Applicants first element of cost base of the total shares in NewCo is therefore $X, being the sum of shares issued on incorporation ($X) and the cost base of all of the Trust units ($X) rolled-over over under Subdivision 124-N.

Second element of cost base

12.            Subsection 110-25(3) provides that the second element of a CGT asset's cost base is the incidental costs you incurred to acquire a CGT asset or that relate to a CGT event, as described in section 110-35.

13.            The Applicants incurred $X of the legal and consulting fees associated with the restructure and sale of the NewCo shares.

14.            The Applicants therefore incurred $X of incidental costs in relation to the disposal of their shares in NewCo that form the second element of their cost base in those shares.

Apportionment of cost base

15.            Subsection 124-790(1) states that the original interest holder can only obtain a partial roll-over if its capital proceeds for its original interest include something (the ineligible proceeds) other than its replacement interest. There is no roll-over for that part (the ineligible part) of its original interest for which it received ineligible proceeds

16.            As the Applicants received HoldCo shares and cash as consideration for disposing of their NewCo shares to BidCo, they are only entitled to a partial rollover with the cash consideration forming the ineligible part.

17.            Subsection 124-790(2) states:

The *cost base of the ineligible part is the part of the cost base of your original interest as it reasonably attributable to it.

18.            The cost base of the Applicants original interest is the cost base of their NewCo shares.

19.            The total of the Applicants cost base of their NewCo shares is $X.

20.            The total cost base of the NewCo shares can be reasonably attributed to the ineligible part as follows:

Cost base of shares in NewCo x Ineligible Proceeds

Total Proceeds

21.            Therefore, the cost base of the NewCo shares that is reasonably attributable to the ineligible part is $X.